Takeaways from plant visit: More positive than we thought

Takeaways from plant visit: More positive thanwe thought Target PriceRMB125.00(Previous TPRMB109.00)Up/Downside9.5%Current PriceRMB114.20 We arrangeda site visit tour for investors to Hengli’s production base inChangzhou on 3 Jun.Keytakeawaysinclude: (1) Strong demand for linearguidewaysdriven by machine tools and semiconductor segments; (2) Hugepotential for ball screwsfor humanoid robots due to strong commitment from themajor customer; (3) Capacity for cylinders, pumps and valves are running at fullutilisation driven bya wide range of downstream demand such as miningequipmentand agricultural machinery.We revise up our 2027E/28E earningsforecasts by 4%/7%, due to higher volume assumptions. We nowforecastPrecision Industry revenue(linear guideways& ball screws)to increase fromRMB80mn in 2025 to RMB0.4bn/1bn in 2027E/28E.We revise up our TP toRMB125(from RMB109), based on48x2026E P/E,1.5SD above the historicalaverage(previously 1SD).Ourexpandedpremium is to reflect both the upcycleofhydraulicbusiness and the huge growth potential of precision business.ReiterateBUY. China Capital Goods Wayne FUNG, CFA(852) 3900 0826waynefung@cmbi.com.hk Stock Data Key takeaways: Shareholding Structure Linear guideways:At present, 90% of the linear actuator products arelinear guidewayswhich are produced in Changzhou factory. The productsare applied in machine tools and semiconductor sectors which saw verystrong demand.High precisionisrequired in these applications. Ball screws for humanoid robots:A typical humanoid robot needs a totalof 14 ball screws (4 for each leg; 3 for each arm excluding fingers). Henglibelieves the keys to success in ball screw business include (1) productdesign; (2) production yield rate (for cost reduction); and (3) inspection (forproductquality).Hengli has strong bonding with the major overseascustomer and can participate in certain product design. Hengli’s productscurrently account for <10% of the total value of a humanoid robot butwillpotentiallyincrease to 10-20% in the future.According toHengli,ball screwshipment volume isinsignificantat the momentbut is expected to see strongvolume growth in 2H26E, and itwill likely allocate the production of ballscrewstoMexico plant.We expect Hengli willfurther expand its capacityover the coming years. Strong growth acrosshydraulicbusinesslines:Demand for excavatorcylinders, pumps&valves is robust,and capacity is running at full utilisation.Forinstance,strong mining activities in Africa have boosted highreplacement demandfor mining equipment. For pumps&valves, Hengli isconfidentof increasing their penetration in the major US machinerymanufacturer(10% at present), astheJapanesehydraulic componentsmakershavejustraisedASP. Capital Goods-Strong sales of earth-movingmachinery in Apr;price hikesplanned forexcavators–11 May 2026(link) Jiangsu Hengli-1Q26 EBIT +34% YoYabove expectation; net profit dragged byFX loss–28 Apr 2026 (link) Jiangsu Hengli–4Q25 earnings miss ongross margin and FX loss; But structuralgrowth outlook still intact–21 Apr 2026(link) Source: Bloomberg,company data, CMBIGM estimates Source: Bloomberg,company data, CMBIGM estimates Riskfactors:(1)Slowdown of demand for hydraulic components;(2)slower-than-expected new business development. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered inthis report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressedby that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) coveredin this research report within 30 calendar days prior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any ofthe HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies coveredin this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stockwith potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad marketbenchmark over next 12 months:Industry expected to perform in-line with the relevant broad market benchmark over next 12 months:Industry expected to underperform the relevant broad market benchmarkover next 12 months CMB InternationalGlobal MarketsLimited Address: 4